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Panel debates whether credit scores unfairly affect car insurance rates

Melissa Nann Burke
The Detroit News
Rep. Rashida Tlaib, D-Mich.

Washington — A Michigan researcher told lawmakers the use of credit history in setting auto insurance rates leads to the potential for discrimination against low-income consumers and contributes to Detroit having the most expensive insurance nationwide.

"Michigan is the canary in the coal mine. I don't think it's alone," University of Michigan researcher Joshua Rivera said Wednesday.

"You see rising insurance rates around the country. You see working-class drivers struggling to pay rates. Part of that is use of non-driving factors."

An insurance industry representative countered that credit scoring is not the reason that rates are high in Michigan and warned that eliminating its use would lead to consumers with good credit paying more for car insurance. 

"What would happen is your drivers who present less risk would be, in essence, overcharged, and people who are at greater risk of being in an accident would be undercharged," said James Lynch, vice president of research and education at the Insurance Information Institute. 

Michigan’s unique requirement that auto insurance policies provide unlimited lifetime medical benefits is the main driver of the state's high auto insurance rates, according to industry experts and some elected officials, including Detroit Mayor Mike Duggan. 

The U.S. House Financial Services Subcommittee on Oversight and Investigations also heard Wednesday from experts on discriminating practices in auto lending and financing.

U.S. Rep. Rashida Tlaib, D-Detroit, said she had pressed for the hearing, where she pushed her legislative effort to block insurers from factoring in a consumer's credit history when setting auto rates.

"Would it surprise you to know a driver with a DUI and good credit score would pay less in auto insurance than someone with no DUI, a good driving history and decent credit?" she said. 

"When I found out I was shocked," Rivera said. 

At the University of Michigan, Rivera co-wrote a study that found auto insurance to be unaffordable in 97 percent of Michigan ZIP codes, with “affordability” defined as 2 percent or less of an area’s median income. 

The state's poorest communities face the highest rates including Detroit, where insurance is the most expensive in the nation, eating up 18 percent of pre-tax income for a typical Detroit household making $30,000 a year, Rivera said. 

He acknowledged that much of the high costs in Michigan are due to the state's unique requirement that drivers purchase unlimited lifetime medical benefits. 

But the use of non-driving factors such as credit history and home ownership explain why rates vary considerably between drivers, Rivera said, noting that rates more than double for someone with poor credit versus excellent credit. 

"This is a big problem, particularly for Detroit residents, who collectively have some of the lowest credit scores in the country," Rivera told lawmakers. 

"We have to ask the question of why people of color are disproportionately represented in the ranks of Americans with poor or no credit. And it's not because of lack of financial skills," Rivera added.

"It's because of systemic, sometimes implicit discrimination that happens elsewhere in the market that ends up showing in things like credit scores." 

An industry representative on the panel said insurers use credit-based scoring as part of a larger algorithm in setting rates because "they're very effective." 

"They are very good at predicting how likely a person is to be in an accident," said Lynch of the Insurance Information Institute. 

Kentucky Rep. Andy Barr, the panel's ranking Republican, asked Lynch to explain how consumer prices would be affected if insurers could no longer factor credit scores in rate setting. 

"For some people and by some measures most people, their rates will go up. For other people, their rates would come down," Lynch said.

"In the state of Michigan, you would still have the average rate would be twice the average than a typical state."

Several Republicans on the panel said Michigan's "sky-high" auto insurance rates should be left to state regulators and lawmakers to deal with, saying it's not a job for Congress. 

"I see no reason for Congress to supersede — in my case — North Carolina's insurance market and also see no reason why my constituents should be forced to subsidize Michigan or any other state for their seriously flawed state insurance laws," said Rep. Ted Budd, R-North Carolina.

Barr said Democrats on the panel were arguing that credit scores are a proxy for race.

"Do you agree with that?" Barr asked Lynch. 

"No, I do not," Lynch replied.

He said a fair rate is based on certain risk characteristics "and all of that, of course, is silent — as it should be — to issues of race and income."

Lynch noted that insurers are constantly reevaluating variables used in rate setting, and he didn't deny the opportunity for improvements to the system. 

Tlaib asked Lynch why a driver living on Mack Avenue in Detroit would get quoted $3,000 more for basic minimum coverage than someone living across the street in the Grosse Pointe area. 

"It's because of the way that the territories have been drawn," Lynch said. 

"You're basing it on ZIP codes, right? Not driving history and driving record. Say it," Tlaib said. 

Lynch said ZIP codes are usually used to determine territory boundaries, but those  boundaries are constantly reevaluated by insurers. 

"One of the things that insurance companies are trying to get a better handle on is something called geospatial coding, which is the use of the actual exact longitude and latitude to set rates," Lynch said. 

Tlaib interrupted the explanation. 

"We call that redlining. It’s a discriminatory practice to base it not solely on people's driving history and those driving factors," she said. "The non-driving factors are hurting families."

Tlaib separately cited a 2014 letter from the National Association of Mutual Insurance Companies to the Federal Insurance Office that she said insinuated people of color can afford to pay more for car insurance because of how much they spend on alcohol, tobacco, pets, hobbies and recording equipment.

The letter concluded that "the percentage of household income spent by minority consumers on automobile insurance appears to be reasonable relative to the percentage of income spent on non-essential goods." 

"Do you know about this letter?" Tlaib asked Lynch. 

"I had nothing to do with composing that letter, but that letter does exist. The minute I saw it I went, 'What could you possibly be thinking?" Lynch said. 

Tlaib questioned why the group "would think about people of color in this way."

"I get I get where you're coming from, I really do," Lynch said, sighing. "The hole it put in your stomach, it put it in mine as well. But I can tell you that the insurance industry doesn't operate that way.

"That was just an unfortunate and gross exception to the way to the way that the industry normally operates. We had nothing to do with that statement," Lynch added.

"But I personally, sincerely apologize that every — any person here was subjected to that kind of thinking."